Have you found a home you love, but it’s not in good condition? Well, the only to live in it would be to buy and renovate it. However, you may realize that the renovation cost is too costly, and you won’t get a loan anywhere.
That’s where an FHA 203k comes in.
An FHA [Federal Housing Administration] 203k is a loan that allows you to purchase the house you want and make the needed renovations at the same.
Say, for instance:
You want to purchase a home that needs a new kitchen or bathroom.
An FHA 203k lender gives you the cash to buy the home renovations plus the finances for the necessary renovations.
FHA 203K basics
FHA 203k loans enable people to rehabilitate houses that require some help and turn them into desirable homes.
The program allows an individual to purchase a home and improve it under one fixed or adjustable-rate mortgage. The money borrowed covers everything from buying the home and renovation, including labor and materials.
Often, lenders are reluctant to offer a home mortgage in poor condition due to livability and safety standards. The FHA 203 K loans, being government-backed, offer insurance to the lenders since the mortgage package includes the renovation cost.
Types of 203 k loans
There are two types of 203k loans: the Limited 203k and the Standard 203k.
The Limited 203k is a smaller-scale loan that offers less financing, less paperwork, and quick processing. This loan covers minor repairs and renovations and is limited to a funding of $35,000.
The Standard 203k, on the other hand, is a larger- scale loan allowing a larger amount of money and bigger improvements and projects. The loan process is more complex and requires an individual to have a HUD-approved consultant for guidance. The minimum amount you can borrow with this loan is $5,000.
FHA 203K eligibility requirements
To qualify for a 203k loan, you will have to meet the same requirements as any other FHA loan:
- Your credit score must be at least 620 or 640 depending on the lender
- Must have a maximum debt to income ratio of 45%
- Must have the minimum down payment of 3.5% or 10% if the FICO score is below 580
- The loan amount should not exceed the county’s FHA loan limits
- The home must be a primary residence and meet property eligibility requirements
Pros and cons of FHA 203k loans
The main advantage of these loans is that you can buy a home in need of repairs that you couldn’t have afforded. In addition, the down payment requirements are minimal with low interest rates.
The disadvantage is that not all properties qualify, and applying for the loan may be quite a process.
An FHA 20k mortgage could be your best option if your cash reserves are low or you have little home equity. With this program, you can find yourself with the home of your dreams and mortgage payment you can afford. Just be sure to get the best lender for an easier process.